Economist Targets Apple’s Alleged Anti-Competitive Conduct

Epic Games’ economic expert testified that Apple restrains competition in its App Store in a closely watched antitrust battle between two tech giants. In his testimony, economist David Evans noted that Apple’s App Store profits are “vastly higher” than those of most online stores.

Customers leave an Apple store on the 3rd Street Promenade in Santa Monica, Calif., in 2019. (AP Photo/Richard Vogel)

OAKLAND, Calif. (CN) — The federal judge overseeing the antitrust fight between Apple and Epic Games had a lot of questions for economist David Evans, chairman of Global Economics Group and Epic’s main economic expert, who took the stand Monday to testify that Apple’s restrictions on developers are causing anticompetitive harm in the iOS app distribution market.

Evans said Apple is exploiting its position as one of two major companies that make operating systems for smartphones — the other being Google’s Android — in order to monopolize the app distribution aftermarket. Once a consumer purchases a smartphone with one particular operating system, they generally stick with it because it’s just too expensive to switch.

U.S. District Judge Yvonne Gonzalez Rogers, who will decide whether Apple has an unfair economic advantage, must first buy Evans’ definition of the relevant market. She seemed particularly interested in any meaningful substitutes for Epic’s popular Fortnite game on other devices. 

Epic sued Apple after its Fortnite app was banned from the App Store in August 2020, following Epic’s decision to bypass Apple’s payment system for in-app transactions — and the 30% cut it takes on all purchases — by launching its own direct payment feature for iPhone users that would let Fortnite players buy in-game credits, or “V-Bucks,” directly from Epic.

At the outset of his testimony, Evans put great emphasis on the distinction between video game consoles and smartphones. “If game consoles were good substitutes for smartphones, people wouldn’t use smartphone,” he said, noting that a console isn’t portable and requires a Wi-Fi connection.

They’re also distinguishable by the types of games they offer. “The preponderance of the games on iOS are not available on consoles,” Evans said, adding that only seven of the top 50 top revenue-generating iOS games are available on any console.

Evans also defined a phone as a “general purpose” device, capable of running a whole diversity of apps, while consoles are more of a “special purpose” device — a piece of hardware that is designed for game play.

Evans was careful to stress the difference because Epic is claiming that they do not compete with console makers like Microsoft, Sony, and Nintendo.

And while Apple makes loads of money from selling iPhones, console makers sell their hardware at a loss.

Gonzalez Rogers grilled Evans for evidence of this generally accepted point raised on the stand by Microsoft executive Lori Wright last week.

“So you’ve seen records from Microsoft, Sony and Nintendo that prove those facts?” she asked. “I’ve heard this a number of times and in a court of law you need facts.”

Evans conceded that he’d gotten the information from Microsoft, but said it’s a “non-controversial point” that consoles are sold at a loss.

But Gonzalez Rogers said she would need actual documentation on the record.

Evans also said computers are not meaningful substitutes for smartphones, even if they can support a variety of apps, because internet users now spend 77% of their time on their phones, and 89% of those people are using apps, not web browsers.

When Gonzalez Rogers asked him how many iOS users only play Fortnite on their iPhones, Evans said he put the number at about 60%.

The judge appeared particularly interested in whether iOS users moved over to other platforms after Fortnite was banned from the App Store. Evans said he observed that only 16.7% of iOS-only players switched to game consoles and PCs.

“That shows a very low level of substitution because more than 80% of the time is completely lost and was not substituted at all,” he said. Epic was only able to recover 9.4 minutes out of the 56.3 minutes iOS users would have spent playing Fortnite on their iPhones.

Gonzalez Rogers asked if he had done any analysis to determine if users just switched to another competitive game. Evans said some probably did, but that he was “not addressing that particular issue here.”

“So some other gaming company could have benefited,” she pushed. Evans said it was possible that some players just substituted a different game, but that would not affect any of his conclusions.

He also said Epic would not be able to make up for the lost revenue from iOS users to be able to just tell Apple to shove it.

But Apple did make plenty of money off the 30% commissions it charges developers in the App Store. Apple’s margins, Evans said, “are high relative to other business and industries I’ve worked on.”

The exact figures are under seal, but based on a comparison of other online marketplaces like eBay, Etsy and Alibaba, Evans concluded that Apple’s profit margin was “vastly higher than this benchmark group of companies. Including the most successful one of these companies.”

He also also testified that over the years, Google, Amazon, Nvidia and Microsoft tried, unsuccessfully, to get gaming storefronts onto the App Store.

“Has anybody ever attempted any other kind of store beyond gaming?” Gonzalez Rogers asked. 

Evans said he didn’t know.

Earlier in the day, Epic’s vice president of marketing Matthew Weissinger said Epic was “absolutely” harmed by having Fortnite pulled from iOS. Because so many people own smartphones compared to consoles, iOS represents a huge area for growth, especially since Epic makes all of its money off of purchases of in-game items that are easy to impulse buy on a phone.

Weissinger also said Apple wasn’t a very good promotional partner. “I felt like it was opportunistic,” he said. “I felt like it was transactional, impersonal. It always felt like they would come into a particular promotion and there would be strings attached or caveats attached.”

But Gonzalez Rogers pointed out Epic’s past partnerships with Sony and Microsoft.

“Is it one-sided only on Fortnite’s benefit when you do collaborations with Microsoft and Sony, or does it benefit both?”

“Yes it benefits both,” Weissinger said.

“So how is it different that Apple is trying to benefit both?”

“It just felt opportunistic,” he said, adding that Apple seemed primarily interested in promoting itself.

On cross, Apple’s attorney Richard Doren showed Weissinger a series of emails that showed Epic gearing up to deploy its own direct payment system outside of Apple and Google’s app stores, called “Project Liberty,” and to drag Apple and Google into an “antitrust battle” over their 30% commission fees.

He was also shown some of his own saved drafts containing notes on Epic’s strategy. In one, he recommends Epic take “the nuclear option” with launching its own payment system. Weissinger also writes that Epic should “create the narrative that we are benevolent,” noting that as a successful, multi-billion dollar company, “Epic is not a sympathetic figure in a royalty share battle.”

Weissinger dodged, saying he didn’t know the context of the notes.

Apple’s attorneys will get a crack at Evans next when the trial continues Tuesday.

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